Long Calls Are a Solid Option

Every so often I need to remind option traders that long calls are a great way to profit with a bullish outlook. So many option traders get caught up in the notion of selling premium that they end up abandoning all strategies that are directional especially long calls. Here is a quick reminder to all option traders who have abandoned buying calls: Please don’t forget to consider them an option.

The first thing I learned as a brand-new option trader was a long call. I considered it a great strategy when I expected to profit from a move higher in the stock for significantly less money than buying shares. Of course, as time goes by and an option trader becomes more knowledgeable, spreads usually become another choice to consider and for good reason. Many option traders seem to forget a long call has unlimited profit potential and there is always a chance the stock might rise more than you had envisioned. When selling premium, you are really limiting yourself despite having better odds to profit.

Take a look below at a recent daily chart of Apple Inc. (AAPL). The stock just like the market at the time was very volatile, but AAPL was finding a way to move higher. In MTM’s daily group coaching class, we noticed the stock had potential support at $160 where the horizontal line is drawn.

A long call with positive delta and positive gamma would have been a great way to profit from this extended move higher over the most recent sessions. Selling a bull put spread at or below the $160 level would have profited too, but to a much lesser degree even though the risk could have been structured to be the same. In fairness to the bull put spread, the stock did not necessarily have to move higher to profit whereas the long call needs the stock to move higher.

Here is the moral of the story: Do not forget about the long call or the long put if expecting a directional move. Of course, there are negative long calls like time decay, but having unlimited gains especially in a volatile environment like we have seen lately is a big potential bonus.

John Kmiecik, Market Taker Mentoring

Trader Education